Feb 4, 2008
Executives
Dwight Grimestad - VP of IR Pat Woertz - Chairman, President and CEO John Stott - VP and Controller John Rice - EVP of Commercial and Production
Analysts
Diane Geissler - Merrill Lynch David Driscoll - Citigroup Vincent Andrew - Morgan Stanley Christina McGlone - Deutsche Bank Eric Katzman - Deutsche Bank Christine McCracken - Cleveland Research Robert Moskow - Credit Suisse Ken Zaslow - BMO Capital Markets Ann Gurkin - Davenport Pablo Zuanic - JPMorgan
Operator
Good day, ladies and gentlemen, and welcome to the second quarter 2008, Archer Daniels Midland Company earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Mr.
Dwight Grimestad, Vice President, Investor Relations. Please proceed, sir.
Dwight Grimestad
Thank you, Eric. Good morning and welcome to ADM's second quarter earnings conference call.
Before we begin, I would like to remind you that we are webcasting our call, and that you can access it at ADM's website, admworld.com. The replay will also be available at that address.
For those following the presentation, please turn to slide 2, the company's Safe Harbor statement, which says that some of our comments constitute forward-looking statements that reflect management's current view, and estimates of future economic circumstances, industry conditions, company performance, and financial results. The statements are based on many assumptions and factors, including availability and prices of raw materials, market conditions, operating efficiencies, access to capital and actions of government.
Any changes in such assumptions or factors could produce significantly different results. To the extent permitted under applicable law, the company assumes no obligation to update any forward-looking statements as a result of new information or future events.
Slide 3 lists the matters we will discuss in our conference call today, and I will now turn it over to Chairman and Chief Executive Officer, Patricia Woertz. Pat?
Pat Woertz
Thank you, Dwight, and good morning, everyone. ADM today did announce a record second quarter earnings of $473 million, up 7% from last year.
Our diluted earnings per share increased 9% to $0.73 per share, and it was a quarter which we successfully, I think, captured enhanced opportunities to expand our margins. We did grow volumes for some of our key business units that demonstrated the value and the strength of our diversified broad asset base and product portfolio.
I am very pleased with this performance, and particularly the positive momentum that we have recently built, in these volatile market conditions. These earnings reflect the outstanding capabilities of our talented people, and the unique global asset footprint to deliver long-term value for our shareholders.
Before I turn the call over for our financial discussion, I wanted to comment that we wish Doug Schmalz the best in his recovery. He had knee surgery on Saturday evening, and he is recuperating at the moment.
So, John Stott, Vice President and Controller, will cover the financial discussion this morning in the slides, and then, John Rice, John Stott and I will return for Q&A. So over to you, Mr.
Stott.
John Stott
Thanks, Pat. Good morning everyone, and thank you for being on the call today.
Turning to slide 4, you will see a summary of this quarter's financial highlights. Net sales and other operating income increased 50%, to $16.5 billion.
Approximately three quarters of this increase is attributable to increases in commodity selling prices, particularly grains and oilseeds, and approximately one quarter is attributable to increased sales volumes of mainly grains, ethanol and soybeans. Gross profit grew 4% to $948 million, as operating margins in oilseeds, agricultural services, and wheat processing improved.
Partially offsetting these improvements was a decrease in the operating profits for bioproducts, which along with LIFO charges, more than doubled to $225 million, reflecting the major increases in commodity price levels. Excluding LIFO charges, gross profits increased 16% to $1.2 billion.
General and administrative expenses for selling, increased to $40 million or 13% this quarter from a year ago, due mainly to three factors. First, we incurred costs of $9 million related to a consolidation project of European operations, which should provide costs, tax savings, and efficiencies going forward.
Secondly, overall personnel costs increased to $15 million. And third, the effective foreign currency translation, primarily from the euro, increased by $10 million.
Financing costs net, which comprises interest expense less investment income, was $44 million in the quarter, similar to last year, as substantially higher average debt levels, used to finance the increases in working capital needs, were offset by lower interest rates, due to the capital market transactions we completed during the last half of fiscal '07. Our effective tax rate this quarter was 31%, up slightly from last year's second quarter, and down just slightly from our 2007 full fiscal year rate of 31.5%, due principally to shifts in our estimated geographic mix of earnings.
Net earnings and earnings per share increased 7% and 9% respectively, representing a new company record second quarter, and building upon last quarter, a very positive first half of fiscal '08. Turning to slide 5, we'll focus on certain items impacting our second quarter's results, and as usual, these amounts are stated on an after-tax basis.
Commodity prices continue to substantially rally throughout the quarter, resulting in an after-tax LIFO charge of $139 million, or $0.21 per share compared to $67 million, or $0.10 per share last year. We also had some gains on the securities and abandonment charges that are shown here to help your analysis.
Net earnings, excluding these items, were $614 million, $0.95 per share in the second quarter '08, compared to $505 million, $0.76 per share last year, an increase of 25% in per share earnings on this basis. You'll find a normal schedule, showing the full breakdown of these amounts by segment for the comparable quarters and year-to-dates, in the appendix to this presentation.
Slide 6 gives an update of our current performance against our targeted long-term performance objectives. As expected, return on the assets for the rolling four quarters ending December '07, has decreased to 13.6%.
This decrease was impacted by the significant increases in working capital and capital expenditures, but, is still tracking ahead of our 13% on average long-term target. Turning to our cost per metric ton of production objective, our rolling four-quarter cost came in at $111.17, slightly over our target of less than $110 per ton processed.
Cost incurred in support of the additional crop volumes handled by agricultural services, cost related to our European consolidation project, and abandonment and realignment charges were included in this calculation. The impact of currency translation and, in particular, the strong euro also increased cost in the fist six months of fiscal '08.
As a commodity processor, we have committed to running our businesses in the most cost effective ways, to be the lowest-cost producer as we identify ways to build shareholder value from the many opportunities that we see. We track all costs carefully to ensure that every dollar spent supports our profit opportunities, or creates cost efficiencies going forward.
We will start to realize cost saving from our recently announced corporate realignment, and European consolidation project, in the next few quarters. Also, a number of our capital projects, such as our investments in co-generation, are investments that will improve our cost efficiencies and build competitive advantage going forward.
Details of the calculations of these non-GAAP RONA, and cost per metric ton performance metrics can also be found in the appendix to this presentation, including by commodity volume breakdowns of prior quarters. Slide 7 is a comparative summary of segment operating profits.
Total operating profit for the quarter increased 25%, to a record second quarter $955 million. On slide 8 to slide 12, I'll review in more detail each individual segments comparative quarterly earnings.
Slide 8 is an operating profit analysis of the oilseeds processing segment. Oilseeds processing operating profit increased 14%, to $219 million from $192 million last year, and was, in fact, a record second quarter for the oilseeds segment.
Crushing and origination results improved $12 million due to ongoing strong global demand for vegetable oil and protein meal. Processing margins in North America, and origination income in South America, both improved and were partially offset by higher manufacturing expenses, principally energy and depreciation.
In addition, European operating results declined, principally due to higher raw material prices. Refining, packaging, biodiesel, and higher results declined $7 million due to an increase of $13 million in charges for assets abandonment's taken this quarter.
Excluding these charges, comparable operating results increased $8 million, due principally to our new North American biodiesel plant, and improved packaged oils margins in North America. Asia results reflect the company share of improved operating earnings of Wilmar International.
We continue to see strong global demand for protein meal and vegetable oil. In the US, [NOVA] has recently reported increased capacity utilization in the low 90% range.
The USDA is projecting a 6.5 million acres shift from corn to beans in 2008. Crop conditions in Brazil and Europe are good.
We do currently continue to see overcapacity in global biodiesel. Slide 9, summarizes second quarter operating profit for the corn processing segment, which decreased 18% to $275 million, from $336 million last year.
Sweeteners and starches results declined $5 million, as increased corn costs and higher manufacturing expenses were almost offset by higher selling prices for all key products. Bioproducts results declined $56 million, due principally to lower ethanol selling prices and higher corn costs, partially offset by increased ethanol sales volumes and improved pricing results.
Current market conditions for corn processing remain mixed. We are currently seeing higher corn costs, and are expecting to see increased average ethanol and sweetener selling prices.
North American ethanol markets are continuing to grow. Spot prices have increased to about $2.40 a gallon delivered.
We look cautiously ahead as forward cash prices reflect market concerns about the industry's ability to absorb new additional capacity scheduled to come into production. Lastly we look forward to the full benefit of NAFTA.
I would turn to slide 10, which highlights our Agricultural Services operating profits. This quarter was an exceptional quarter for our merchandising and handling businesses, which drove overall Agricultural Services operating profits up 140% to $315 million.
Merchandising and handling results improved $194 million, as we handled record quantities of grains and oil seeds, and capitalized on margin opportunities in grain origination, freight, and export markets. These opportunities resulted from large US crops, global grain imbalances, volatile market conditions, and expanding supply chain needs.
Operating earnings from barge and truck transportation declined $10 million, due principally to higher fuel and labor costs, and somewhat lower southbound barge freight rates. Rapidly changing market factors translate into facing a different set of market opportunities for Agricultural Services each new quarter.
We continue to see volatility in ocean freight and commodity markets, and have seen that the largest part of the US crop has already moved to market. Slide 11 is an operating profit analysis of the other segments showing a $38 million improvement to $146 million, from $108 million last year.
Wheat, cocoa, and malt improved $28 million due principally to improved margin conditions in North American wheat milling, and our malt business. These improvements were partially offset by weaker cocoa press and chocolate margins.
Current conditions in cocoa should support a better margin outlook going forward, and we continue to focus on finding network and plant efficiencies in wheat processing, and on driving cost efficiency improvements in our malt operations. Financial earnings increased $10 million due to marketable security gains from the company's brokerage services business.
Slide 12, looks at our corporate costs, which increased $132 million, to $270 million due principally to the $118 million increase in LIFO inventory valuations caused by significant commodity price increases. Net investment income, increased $15 million, and corporate costs were up $11 million mainly due to the cause of European consolidation project.
Other costs principally the elimination of our minority interests increased $18 million. Slide 13, is a summary of the company's financial condition, as of December 31st.
The strengths of our balance sheet, and access to liquidity in the capital markets, has allowed us to support a significant increase in our working capital levels, and capture the profit opportunities it provides. Working capital increased $5 billion, due principally to increased commodity price levels.
To put this into context, CBOT soybean futures prices are up over 70% year-over-year. Wheat futures were up anywhere from 55% to 100%, depending on the delivery month, and Corn futures prices were up 20% to 30%.
Capturing profit opportunities through prudent risk management of working capital is critical to enhancing shareholder value. Having the flexibility to capture these opportunities, was instrumental to our strong performance in these very volatile market conditions.
We understand that working capital costs can be very significant for our business, and we monitor efficiency very closely. Despite the higher absolute dollar levels, we are pleased with our overall management of working capital for example of receivable levels, as our daily sales outstanding trend has been positive.
Property, plant, and equipment increased $564 million, primarily due to good progress with our ongoing construction program. Short and long-term debt increased to $4.5 billion to support the increased working capital needs.
Slide 14 focuses on our first half cash flow highlights. Cash generated from operations before changes in working capital, remain strong at $1.4 billion, reflecting our strong earnings performance.
As previously mentioned, to support the higher working capital and capital spend, our total debt rose approximately $4.5 billion from June '07. Cyclically, it's normal to see our debt levels rise during the first half of our fiscal year, but this year's trend is more pronounced due to the significant increases in commodity price levels, that we have seen.
Dividends were normal, and we had no significant share buyback activity this quarter. At this time, I'll turn the call back to Pat and we'll be glad to take your questions.
Pat Woertz
Thank you, John, and thank you for filling in for Doug. Operator Eric, if you don't mind please open the call for questions.
Operator
(Operator Instructions) Your first question comes from the line of Diane Geissler with Merrill Lynch. Please proceed.
Diane Geissler - Merrill Lynch
Good morning.
Pat Woertz
Good morning, Diane.
Diane Geissler - Merrill Lynch
Congratulations on your quarter.
Pat Woertz
Thank you.
Diane Geissler - Merrill Lynch
Hey, just a question here on the AG services, which has obviously exceeded expectations, big crops here in the US. Can you just give us some idea about what we should look for on the kind of longer-term basis, kind of what's the sustainable level in that business?
Pat Woertz
Well, let me start on that, Diane, and then maybe John Rice can jump in. Each quarter gives us a different set of opportunities to look at, and I would suggest the size of the crop this year in certainly our merchandising and handling this past quarter has been something that has given us tremendous opportunity to take advantage of.
We have the opportunity to export as, in fact, maybe more or so than almost anyone. We've got the balance sheet to finance the opportunity in terms of increased working capital.
So, I know that doesn't give you a lot of specifics about the longer term, but it does say we are of the size and scope that if anybody can handle these opportunities, we should be able to do so. John.
John Rice
Diane, actually what's happened this last year too is we saw a very good wheat export throughout the United States, moving that around to different parts of the world along with corn. Soybeans are down a little bit this year, but it's really been our group's effectiveness in working together with the global markets and moving crops from one area to the next.
We have the South American harvest going to be coming on here shortly. Brazil is starting in Mato Grosso, and we have to watch the range in Argentina here in the next two to three weeks.
But long-term, I think we are very well setup to be able to manage these volatile markets and along with the freights.
Diane Geissler - Merrill Lynch
Well, I guess my question is; if we do see the acreage switch back in the US this year, as you indicated that USDA is 6.5 million acres, obviously it's a long time until we actually plant. But, do you see acreage switch back?
I mean the volume coming off of soybeans is smaller than the volume coming off of corn. So I guess, is this kind of a record level and we'll never see this level again?
If we do have that switch back, I mean if you could just maybe talk about it in volume terms, which you would expect to handle?
John Rice
Well, a lot of the switchback is still up in the air. That was the latest USDA number.
A lot has to do with how the weather perceives here in February and March and also what the prices of commodities are at that time. And a lot of the acreage we are seeing switched is really more on the fringe areas.
We still see the Midwest, Iowa, Illinois and Ohio areas still going to plant a lot of corn. So on the total bushel acreage, or total bushel number, I still don't see how it will all play out.
But it's not going to be as dramatic as what I think everybody thinks right now.
Diane Geissler - Merrill Lynch
Okay, I appreciate that. And then I guess a question on oilseeds.
If I look at the volume numbers you have indicated for the first six months, it looks like the second quarter volumes were still up in the second quarter. They were not up as much as they were in the first quarter.
Is there a timing issue there? Could you maybe comment on where we stand on capacity utilization rates in sort of your major geographies?
I think you gave some industry data, but if you could just talk about it, and particularly in North American market and expansion plans there to give us a feel for what's happening in the North American market?
John Rice
We're seeing a very good demand for meal, export of meal and domestically. Then also on the oil side, we are seeing biodiesel demand coming to the market as the markets move and the basis moves with it.
So people are able to move a little bit of biodiesel over to Europe. We are also seeing very good demand coming up here in the last month or two on exports over to China.
So, right now as North America sets, I see very good demand going forward. The key in the North American market is that there will be an inverse in the market in July, owing to new crop and how the actual size of the crop churns out and then actually how we manage our way through that inverse.
So, that's really going to be the key going forward.
Diane Geissler - Merrill Lynch
Okay. Thank you.
John Rice
Welcome.
Operator
Next question comes from the line of David Driscoll with Citigroup. Please proceed.
David Driscoll - Citigroup
Great, thanks a lot. Good morning, everyone.
John Stott
Good morning.
Pat Woertz
Hi, David.
David Driscoll - Citigroup
Pat, on the last call, I think both you and Doug had commented on your expectation to see better co-product pricing, and as a result, better net corn costs. Given the report today, that doesn't appear to be true that net corn costs were actually higher.
Can you talk about the trend here? And obviously I watch the corn prices in the market.
I see what's happened there. But I would have suspected that you would have been more insulated to those things with some hedges.
Can you give us a little color on what happened in the quarter relative to those comments from last call and then maybe a bit of an outlook? How worried should everybody be with corn prices at these levels?
Pat Woertz
Well, co-product credits for wet milling are strong. They are roughly about 45% of corn price, but spot net corn is higher and probably higher than maybe your expectations or than others for the second quarter.
I think our ability in the longer term to manage through where we are toward the end of the cycle here or the end of the season in the US is important, and I think there is going to be kind of a mixed outlook going forward in the corn sector. John, you might want to comment at least on the pricing side as well?
John Stott
David, we're also comparing here year-over-year on quarters. So, there has been a runoff on the market there.
But also, we are seeing very good co-product credits as we had and Doug mentioned in the last conference call. But as markets move higher, we're obviously going to see a little bit of a pass-though come to our P&L on that.
I mean, we never have a 100% of corn bought at any given time for a whole year.
David Driscoll - Citigroup
Well, thus, can we simplify the statement and just say that with the rise in corn prices, the net corn costs given $5 a corn is likely to be more owner-risk in the next 12 months than it was in the past 12 months? Is that a reasonable statement?
John Stott
I guess I necessarily wouldn't say that.
David Driscoll - Citigroup
Wouldn't say that?
John Stott
Right.
David Driscoll - Citigroup
Could you give us some color around that?
John Stott
I guess I totally didn't understand the question.
David Driscoll - Citigroup
Are corn costs going to be more owner-risk over the next 12 months than they were in the past 12 months? Should we look for favorability or should we look for a negative variance over the course of the next year?
Pat Woertz
That's really hard to say, David. That's one of those that gets really close to guidance.
I mean --.
John Rice
The market trend is really going to dictate a lot of our corn costs. That's may be the best way to say it.
Now, how things go from quarter-to-quarter, you always have variance just on timings of your shipments, just on timing on how the bushels are slotted at any given period of time and just how it goes to the accounting book. So, I think the best way to look at it is going forward as corn prices go higher, yes, our net corn prices will show up increases.
David Driscoll - Citigroup
Okay, thank you. Two more quick questions on the corn side.
Ethanol prices, Pat, you made a comment about this. Sometime in the past, you have given us a little color on the difference between contracted volumes and spot volumes.
Were spot volumes the significant component of your sales in the quarter? And really, the heart of my question here is, should we be looking for a significant step-up in ethanol pricing in the next couple of quarters, given what've seen in the spot market, or is ADM substantially contracted out, thus you wouldn't see a movement reflecting spot changes?
Pat Woertz
Actually, spot is a higher and higher amount, I think, each quarter. Or maybe another way to look at it is there are shorter contract periods than there have been in the past.
So, a little bit of the inverse of what you were saying, not long-term contracts on a 100% basis. Therefore, going forward in the full year, I do think that spot prices are higher, but we expect ethanol prices to be up versus the second quarter.
When you look at many quarters, you see a little question mark about the market, and you see some question about whether or not the full capacity as it comes on-stream will have a home? But we do see much more spot activity.
John Rice
That's exactly right, Pat. As everybody sees the same data you're looking at, David, is they see a lot more capacity coming on.
You see the South America crop coming on and sugar harvest along about April, May. So, everybody is just really playing it more hand-to-mouth.
Some people maybe go out two to three or four months, just make sure they have a supply if they're opening up a new market. But, right now, everybody sees a lot more of supply than the demand, going forward, and they have everybody just going on a month-to-month basis.
David Driscoll - Citigroup
If I could sneak in a final question, did you see any shipments to Mexico pursuant to an opening of the border on January 1, did that actually start to happen?
John Rice
We haven't shipping to Mexico over the last two, three years because we've had a -- I forgot what the word is, not a quota, but allocation on shipments down there. To say there was any more right before the first year as opposed to after the first year, no.
But we see with NAFTA shipments going to keep increasing to Mexico, we feel over this next year.
David Driscoll - Citigroup
Thanks for the comments and congratulation on a nice quarter.
John Rice
Thank you.
Pat Woertz
Thank you, David.
Operator
Your next question comes from the line of Vincent Andrew with Morgan Stanley. Please proceed.
Vincent Andrew - Morgan Stanley
Good morning, everybody.
Pat Woertz
Good morning, Vincent
Vincent Andrew - Morgan Stanley
John, I think to follow-up on Diane's question, I think what you were alluding to, and tell me if I'm wrong, but it sounds like the switch back from corn to soybean, if one takes place, will probably take place on acreage that yields well below the 150 bushel per acre average, and therefore, the volume effect will be lower than we would think on a weighted-average-basis. Is that about right?
John Stott
Yes. That's what our thinking is right now and a lot of the market is thinking.
It's really more of the fringe acres or fringe areas that will see more of the dramatic switch.
Vincent Andrew - Morgan Stanley
Okay. Obviously, it'd be hard to imagine that the volume will increase from more corn acres this year, regardless of which ones they were, it didn't help.
But was it volume that really drove the out-performance or was it price and supply dislocations, or just higher overall prices in AG services? I mean, can you give us any greater color on that?
Pat Woertz
That's a great comment.
John Stott
It's all of the above. This is one of the first years in a long time that we exported a lot of wheat out of the United States.
We saw a lack of a lot of corn and soybean exports. And different parts of world had -- Australia, had a bad crop.
So, the normal shipping changes were not the same, and we were able to execute on that very well in this last two quarters, actually the last year.
Vincent Andrew - Morgan Stanley
Are you gaining market share versus the local player due to your global reach, and I would imagine the local player could be strapped from a working capital perspective, has that been an opportunity for you?
John Rice
I guess I won't know the answer to that question.
Vincent Andrew - Morgan Stanley
Then I guess it won't, okay.
John Stott
Sure, and we're at all parts of the world. And yeah, I'm sure our people do, but I actually don't know the answer to what our volume is in any given particular region of the world whether we gained a lot or not.
Vincent Andrew - Morgan Stanley
Okay. But you don't generically disagree with the idea that that's possible?
Pat Woertz
The premise that we have the strong balance sheet to be able to use these working capital increases is the right premise.
Vincent Andrew - Morgan Stanley
Okay. And just in the transportation component of AG services, what's going on now?
It wasn't large, but I think most people would have expected that you'd be able to do better in that segment, not worse.
John Stott
Well, fuel costs were higher in the transportation sector; that's our trucking and also barge line. And we saw a downturn in imports in the United States just because of the construction industry.
So, barge rates were not as high like they were in the last couple quarters.
Pat Woertz
And Vincent, you may recall that this is off from a very good quarter in '07.
Vincent Andrew - Morgan Stanley
Okay.
Pat Woertz
So, it's still a good quarter in transportation. It's just off from a very high one.
Vincent Andrew - Morgan Stanley
Okay. Thank you very much.
I'll pass it along.
John Stott
Thank you.
Operator
Your next question comes from the line of Christina McGlone with Deutsche Bank. Please proceed.
Christina McGlone - Deutsche Bank
Good morning.
Pat Woertz
Good morning, Christina.
Christina McGlone - Deutsche Bank
If I look at sweeteners and starches on a sequential basis, I was a little surprised to see that it was down, because I would assume pricing as relatively the same sequentially, volumes are probably lighter. But you had the benefit of the new crop coming in, so I thought your net corn costs would be lower.
But then bioproducts was higher than we expected. Was there any shifting, maybe of capacity out of fructose into ethanol because, maybe, ethanol spot prices ran on you in the quarter?
Pat Woertz
We're trying to follow your question here, Christina. John?
John Stott
Okay. Christina, I guess, you are correct.
I mean partly the net earnings were down, or earnings were down sequentially. I don't think it was really a very significant decline, and obviously, similar to the quarter a year ago.
No one single factor really caused that. It's lots of things that go in there.
As we mentioned, there is an impact from higher corn costs that was offset by higher selling prices. It's difficult to break it down for you.
I'll give you one thing that's really deeper than that.
Christina McGlone - Deutsche Bank
So, sequentially corn costs were higher?
John Stott
Sequentially corn costs were a little bit higher. Yeah, just a little bit higher.
Christina McGlone - Deutsche Bank
Okay. But the volume was just normally how it is.
Wasn't there any kind of swinging back into ethanol?
John Stott
No, volumes were very normal.
Christina McGlone - Deutsche Bank
Okay. And then you had mentioned higher manufacturing costs, what were those?
John Stott
Principally it is energy. Fuel costs are up from a year ago.
We had a little bit more repair and maintenance type-cost activity going on too, but principally energy.
Pat Woertz
And keep in mind, Christina that our fuel costs, which are in the transportation sector, are also included in that manufacturing cost.
Christina McGlone - Deutsche Bank
Okay. And then, next question.
If you look at use of ethanol last year versus demand, we were say 1.5 billion to 2 billion gallons above. And I understand that those credits carry-forward into '08, but expire at the end of this year.
So, is there a way that ethanol demand in '08 could be lower than 9 billion gallons because of the use of these rents?
John Rice
Yes, it is correct. I don't remember the exact number, but I think it's maybe an 800 million gallon number of the rents.
But a lot of it has to do with whether the customers have the infrastructure in, whether they want to go buy the rents whatever the rents are at; I think they are about a nickel right now, or if they're going to start blending ethanol, they're just better off because of the discount or the value of ethanol that too are about, if it makes more sense for them to blend ethanol. So, that could be a factor going forward.
Christina McGlone - Deutsche Bank
Okay, thank you.
John Rice
You're welcome.
Operator
Your next question comes from the line of Eric Katzman with Deutsche Bank. Please proceed.
Eric Katzman - Deutsche Bank
Hi. Tell me to tag team over here.
I guess I have just kind of a quick follow-up to Christine's question on the rents, John?
John Rice
Yes.
Eric Katzman – Deutsche Bank
But I thought if those expire by the end of this year and therefore wouldn't it be really to the advantage of the refiner to use them, because otherwise they go away?
John Rice
Well, it's going to be a financial decision. Are they better off to pay $0.04 or $0.05 per rent or are they better off doing that or if they can blend ethanol and let's say it's 30 over and they get $0.51 tax-break and they get $0.20 that way, are they better off blending ethanol, a lot of that has to do with their refining capacities and logistics and everything else.
So, I wouldn't say necessarily it's automatic on that.
Eric Katzman - Deutsche Bank
Okay. And then just I guess a question to Pat.
I'm a little bit, I guess first of all, you've obviously, the disclosure versus years ago is fantastic and I have to thank you for that. But I'm a little bit, I guess surprised on slide 5 that you would use LIFO as kind of an extraordinary item because in reality the AG service business benefits from the rising volume and pricing of the commodity markets and so to a certain extent the offset is the LIFO charge.
So I think it's a little bit of apples-and-oranges there, or kind of cherry-picking let's say. Can you kind of respond to that?
Pat Woertz
It's a great observation. Actually Eric, we've had some of the same discussion ourselves as to what is with unusual items, and with the higher commodity prices.
What we've seen in about of couple of years, LIFO is actually more of a usual charge in a quarter than an unusual one, and then towards the other things on the page. So as we continue to want to disclose more, I think you're always going to hear about the LIFO charge.
Now whether or not it turns up on a page, earnings, earnings or earnings you know that is what we all do. So I think both numbers at the moment are important to kind of look back and see our historical way of reporting but, I think you're right about how unusual it is.
Eric Katzman
Okay, and then its too bad about Doug and his knee, I've been through knee surgery. But, you own a bank that's kind of buried into the financial numbers, and I assume that it's doing quite well given farmer income and land values.
But given everything that's been going on with banks, is there anything in the bank balance sheet that we need to worry about, maybe because he's out, and it's too specific a question, but do you have any thoughts there?
Deutsche Bank
Okay, and then its too bad about Doug and his knee, I've been through knee surgery. But, you own a bank that's kind of buried into the financial numbers, and I assume that it's doing quite well given farmer income and land values.
But given everything that's been going on with banks, is there anything in the bank balance sheet that we need to worry about, maybe because he's out, and it's too specific a question, but do you have any thoughts there?
Pat Woertz
Yeah, I think since you ask the question about worry, I'd say its not. No, it's a very normal transaction.
There is work that the bank does for us and fits into our scheme. You'd argue it's not necessarily a strategic asset that one that we held for a while.
John, do you want to comment at all on the financials?
John Stott
Yes, I think I'd just add from a numbers point of view the results were very normal this quarter and from an analysis of the closing position, we don't believe that there is anything to worry about it in the bank's balance sheet. So, there is nothing to worry about, going forward.
Eric Katzman
So, is there no sub-prime stuff that's being killing every bank on the planet?
Deutsche Bank
So, is there no sub-prime stuff that's being killing every bank on the planet?
Pat Woertz
We are not a really big city here, Eric.
Eric Katzman
Yeah I have been there.
Deutsche Bank
Yeah I have been there.
Pat Woertz
So we might not have the same credit issues, maybe on the sub-prime as elsewhere.
Eric Katzman
Okay. Alright.
I'll pass it on. Thank you.
Deutsche Bank
Okay. Alright.
I'll pass it on. Thank you.
Pat Woertz
Thanks.
Operator
Your next question comes from the line of Christine McCracken with Cleveland Research. Please proceed.
Christine McCracken - Cleveland Research
Good morning.
Pat Woertz
Hi, Christine.
John Rice
Good morning.
Christine McCracken - Cleveland Research
I just wanted to get an update, if I could on your new ethanol capacities and when that might be coming on line?
Pat Woertz
Actually it's a great question about all of our projects and one thing we wanted to mention is that, next quarter we'll give an update on all those projects. After we get through the winter here which has to do with a major piece of the construction period, particularly the weather, steel delivery et cetera.
We'll give you an update on both the projects and the timing. Having said that, there is one -- the two projects, one is expected to come on at the end of '08 and the other towards the end of '09.
And that's pretty close to actually maybe pushed out just a tad from our original estimates.
John Rice
Again, there is lots of that. I was up visiting one of the plants during this cold weather, with 20 below and about 30 mile an our wind, it is very tough to work outside.
So, like Pat said, we will update that once we get through the winter months and we'll have a better indication on when the completion dates will be.
Christine McCracken - Cleveland Research
You get the sun [stirred] in the cold weather, freezing temperatures is having any impact on anther plants might come on line when you look out at the scheduled capacity additions that, I guess, lot of the industries looking for. Is it, your expectation that maybe some of that will come on a little later then it is currently planned for?
John Stott
If it is having an effect on us, it's having an effect on everybody, but also a working capital is an issue for a lot of these smaller companies. When they have to -- once they actually get their plant built they have to go out and source the corn, they have to be able to carry inventories.
We are hearing plants not being able to start up just because of working capital issues. So, I think it's a little bit of everything for everybody, but long-term I still think, we are going to have over.
We are going to have enough capacity on the market, once April, May, gets around. The market is still very tight, during -- well, I would say through March, April.
Christine McCracken - Cleveland Research
We've heard lately that there is a possible proposal coming from the administration to pull that Brazilian ethanol tariff off. Have you heard anything like that and what kind of impact you can tell it have on the market, assuming that it came on about the same time as all this additional capacity?
John Stott
I've heard talk of that but I have not seen anything concrete right now, the tax goes through 2010. And what happens is if all of a sudden the tariff is reduced, or taken off, I think what will happen is we will just reduce the price of corn, and it will end up coming back in the margin.
Christine McCracken - Cleveland Research
Alright, great. And then just on the changes in the Florida market.
Obviously that's a huge potential market for ethanol. Can you give us an update on where that proposal stands?
Is that your expectation of that state in fact will be a much bigger market for us and on here in the short-term?
John Stott
Yes, we are seeing a lot of interest in all of Southeast. We are shipping to a lot of the Southeast destinations.
So, I feel that market will come on very strong here in this next year.
Christine McCracken - Cleveland Research
Would that help with that kind of glut of ethanol that we might see here in the spring? Is that --?
John Rice
No, I think what will happen is that we have probably 11 billion gallons of capacity coming on. It will be here about May or June.
We have the South American crop coming in. We got 9 billion mandates.
We have the rents, which you could take the demand back to about an 8.3. So, it is going to be a supply and demand situation.
But there are a lot of factors and a lot of issues that always tend to come up. I mean, with last conference call or the conference call before, we were talking $1.50 ethanol and we're never going to go higher.
And all of a sudden, we're $2.40 again. So, there is a lot of volatility in these markets just like a lot of other markets.
Christine McCracken - Cleveland Research
Alright. I'll leave it at that.
Thanks.
Pat Woertz
Thanks, Christine.
Operator
Your next question comes from the line of Robert Moskow with Credit Suisse. Please proceed.
Robert Moskow - Credit Suisse
Hi, thank you. I'd like to focus in on AG services again.
Forecasting where the profitability is going to go, it's very meaningful to us here, because it gets us a little bit closer to what normalized earnings could be considered. So, I'm going to ask you about two comments you made in your prepared remarks.
You said that that with the crop ending now in North America, the largest amount of volume has already moved. And since you're largely a northern hemisphere company, in terms of your assets, does that mean that the next six months, we should see lower volume and lower profits in AG services just because of the way your assets are balanced around the world?
And then secondly, you also said that it's becoming more and more important to capture profit opportunities as they come up within AG services. Does that refer to actually moving physical grain around the world, or does it mean that your traders are seeing discrepancies in the market and that there are ways to capture them, just using the futures market?
Thank you.
John Rice
That's a very good question. It's a little bit of everything in that.
We went through a big volume period during the harvest, and we're handling a lot more grain, but there is still a lot of grain around. When you drive though the Midwest, you see a lot of corn sitting on the ground.
So, that still has to come to the market. We still are moving soybeans.
We are seeing very good soybean demand out of the United States, and we are also still shipping the wheat. So, we are able to move that around.
And this next quarter, I still feel it would be very, very good volumes. I don't see a slowdown in volumes at all in this current quarter.
And then also, we are going to have the South American harvest coming on. We're going to be handling grain out of Argentina.
We are going to be handling grain out of Brazil. Those plants would be up and running.
So, it's always hard to answer the questions and not give guidance. So, I guess at times, I don't see the volumes dropping off, and I guess this is the best way to say that.
Pat Woertz
Another maybe build on that, Rob, is these opportunities that present themselves are global. So, it is not just the US crop that you asked about, it is actually the traders moving grain, or international trading opportunities which continue to be there, and keep in mind the globality, if at all.
Robert Moskow - Credit Suisse
I appreciate that. One last question.
There has been an article in The Journal today and lots of reports around the world about some countries instituting price controls as a way to protect consumers in those markets. If price controls become more apparent, does that have any effect on you or do you just not care?
John Stott
Well, I won't say we don't care, but depending on the size and the scope, it can have an effect. But also, the world supply and demand of grains is really going to be the deciding factor in all this of some countries in net import, inputs in price controls and world demand for meal and oil and poultry and everything else was up.
I don't know exactly, how would that go into another own country, but the large supply and demand is playing very well in the declining markets right now, and everybody is looking at the great demand we are seeing globally for both meal and oil. And so, putting price controls can have an effect, but if we can move our products to other places in the world for more money, people are going to be doing that.
Robert Moskow - Credit Suisse
Then I just think theoretically, longer-term price controls always seem to collapse and hurt the economy. But shorter-term, I imagine you could make the argument that it would keep demand high in these emerging markets, and therefore, keep the demand for the grain and oil.
But your exporting to those markets is high. Is that a fair statement?
John Stott
Well, China, there is a great example. They put on price controls.
We're still seeing them buy soybeans or we're seeing them coming in and buying a lot of vegetable oils. They're trying to build up their reserves in those commodities.
Robert Moskow - Credit Suisse
Okay. Right, thank you.
Pat Woertz
Thank you, Rob.
Operator
The next question comes from the line of Ken Zaslow with BMO Capital Markets. Please proceed.
Ken Zaslow - BMO Capital Markets
Hi, good morning, everyone.
Pat Woertz
Good morning, Ken.
Ken Zaslow - BMO Capital Markets
I guess, just not harping on these AG services, but I guess the question that comes out is, have you seen the dislocation of commodities get resolved? Is there, therefore, no more opportunity?
Is that seemingly what you're implying, or is that not true?
Pat Woertz
Don't harp away, Ken. That's not what we were implying at all.
Ken Zaslow - BMO Capital Markets
Okay. So, again, there is no reason to believe that this dislocation should continue and the margin opportunity should continue, maybe not at this level, but maybe at the quarter or still before.
Is that fair?
Pat Woertz
Every quarter looks different, and while they blend into one another, I think we've tried to tell you a little bit about the current market conditions here in January as we sit today. But there are still opportunities.
And as John talked about the quarter that we're currently in, those opportunities still exist.
Ken Zaslow - BMO Capital Markets
And can you remind us how LIFO charges actually impact your cash flow and your tax rate, and how do they get resolved in the future?
John Stott
Well, yes, there is no real effect on the cash flow, Ken. There is an effect of deferral of tax payments.
I think how they get resolved in the future is a difficult one. I mean, the way that LIFO works is to the extent that prices go down and continue down, we'll start to see the recovery of some of the reserve that we've created up until at this point.
Is that specific enough for you?
Ken Zaslow - BMO Capital Markets
Yeah. And then there is no cash flow impact and it should potentially low your tax rate, going forward?
John Stott
Yes, correct.
Ken Zaslow - BMO Capital Markets
Okay. And then the other question I had is regarding the wheat, cocoa and malt businesses, I know it's small as it's not the key driver, but their performance seems to have been pretty good.
I know there was a lot of restructuring, and a lot of efforts are being put there. Is this a sustainable level or is this something that's just seasonal in timing?
Pat Woertz
Actually, we hope to even improve over time, because I think there is still some margin improvement to be seen in the cocoa area. Wheat was the largest driver of the improvement this time, I think, as we've said.
Ken Zaslow - BMO Capital Markets
And what was the cause of that? Was it just the higher pricing being able to be passed through?
And is it the lag-over or is this just a timing issue?
Pat Woertz
Also it is a combination of some efficiencies which we had in our plant. Sorry, John, you were going to answer?
John Rice
I was just going to say it's really about moving a lot of the North American wheat crop around. There were some areas that had good crops, and other areas that did not have a very good crop.
And we have plants located throughout North America and our transportation is excellent in this area. And we're able to bring wheat from one area to the other area, and work with our customers to be able to come up with their products.
I think that's really the driving force behind that.
Ken Zaslow - BMO Capital Markets
Great, I appreciate it
Pat Woertz
Thanks, Ken.
Operator
(Operator Instructions) The next question comes from the line of Ann Gurkin with Davenport. Please proceed.
Ann Gurkin - Davenport
Good morning.
Pat Woertz
Good morning, Ann.
Ann Gurkin - Davenport
I just want to touch on the supply and demand globally for grains; the tremendous demand for the grain; and the tight supply, particularly with what we've seen in wheat and soybeans. And I guess a question I wrestle with a lot is, what can throw off demand?
What are the biggest risks? What are you worried about the most?
To me, it looks like supply will stay tight for some time, but is it demand that could change?
John Rice
We're seeing the higher acreage in wheat in Europe, and that wheat crop is looking very good right now. South America is having a very good crop coming in.
So I mean, I feel globally the supply looks like it should be a little bit better this year over next year. The demand-side is always a $64,000 question.
How does that come in? I feel, we'll always maintain the food-side of the market, and we're seeing growing economies throughout the world.
So, I see the food-side coming. Now, if all of a sudden, energy prices drop, that can have a major effect on what happens to the commodity prices.
But right now, we're in a very good demand-driven market along with a couple of short supply areas that really started the run-up. But it's always going to be the weather, and what's happening in any given week or day, on how these markets are going.
Ann Gurkin - Davenport
Okay. And then, as you look out into the second half, can you all comment on what you expect the Euro to do?
Or can you give any kind of currency outlook?
John Rice
No.
Pat Woertz
We will not, Ann.
Ann Gurkin - Davenport
Okay. And then, third, I think you opened a palm oil facility in Germany.
Can we get an update on this? Is that facility meeting expectations?
I think I have read somewhere that the palm oil prices are up significantly.
John Rice
Yes, that's meeting and actually exceeding expectations. As a matter of fact, we're looking to put another expansion in here in the next two quarters.
Ann Gurkin - Davenport
Great.
John Rice
...seeing that the demand for oil and biodiesel and food in Europe has been very good.
Ann Gurkin - Davenport
Great. Thank you.
Pat Woertz
Okay, Ann.
Operator
Your next question is a follow-up question from Eric Katzman with Deutsche Bank. Please proceed.
Eric Katzman - Deutsche Bank
Hi. Thanks for taking the follow-up.
I have just one quick one, again, on the LIFO and working capital. It is temporarily cashflow-negative, right?
I mean, you're borrowing $5 billion on CP, to pay for the higher cost inventory, and you have pay something on that, right? And I guess you get it back, but is it at least a temporary cash flow issue?
John Stott
Well, I mean, I agree as prices have run up, we have to borrow more money to finance that inventory. But Eric, we'd have to do that irrespective of what our inventory accounting basis was.
So we don't kind of make the same direct connection between cash-back to the cash flow in that respect and LIFO.
Eric Katzman - Deutsche Bank
Right, okay. And then I'll let that be.
I think you had mentioned that capacity utilization globally in oilseed processing was around 90, is that right?
John Rice
I think that the comment was North American…
Eric Katzman - Deutsche Bank
With North America, I think Diane may have asked this question earlier, where do you see that in terms of global utilization? And how comfortable are you, Pat, with the big four including yourself obviously, in terms of how you look out over the next few years with lets say pretty good demand versus what I think is fairly high utilization rates?
Pat Woertz
We're trying to report the US NOPA, because that is one that you can look up yourself. But I think the point there is that trend-wise, they are at a higher utilization from last year's quarter, and even last quarter.
I think globally, it's moving up, but we still actually have some capacity in our China operations. So, we still have the room to grow and have looked at them, and making that kind of strategic plan, so that we can absorb the growth as it continues to occur.
So, matching growth with expected market is our look.
Eric Katzman - Deutsche Bank
And do you think, I mean, you obviously have a better view into companies like Cargill and Dreyfus than certainly we do. Is it your sense that their utilization rates, based on what you hear, are they comfortable where they are?
Are they creeping up to the point where they have to add more capacity, or could we keep on this great run for a while?
Pat Woertz
No. I can't comment on my competitors' operations, Eric.
You know better than that, but I can say that we're comfortable with the additions that we're adding, as well as the growth that we see and obviously with [me on] protein, meal and vegetable oil demand being where it is, I think, there is continued opportunities here and those that operate with scale. We'll benefit from this.
Eric Katzman
Okay. Thanks for taking the follow-up.
Deutsche Bank
Okay. Thanks for taking the follow-up.
Pat Woertz
Okay, thanks Eric.
Operator
Your next question comes from the line of Pablo Zuanic with JPMorgan. Please proceed.
Pablo Zuanic
Good morning everyone. Just a couple of follow-ups but I want to go back to a comment you made regarding this Brazilian sugar ethanol imports, and you are making the argument that really you would have to buy less corn.
So as a result, corn prices will go down, but I suppose there would be a big lag there. And at the same time, if you're buying less corn, you're producing less ethanol because you'll be losing share to the Brazilians, and that would probably create a lot of operating inefficiencies.
I mean, I want to be clear that Archer Daniels did not say that sugar ethanol imports from Brazil will be neutral to earnings to [where they are].
JPMorgan
Good morning everyone. Just a couple of follow-ups but I want to go back to a comment you made regarding this Brazilian sugar ethanol imports, and you are making the argument that really you would have to buy less corn.
So as a result, corn prices will go down, but I suppose there would be a big lag there. And at the same time, if you're buying less corn, you're producing less ethanol because you'll be losing share to the Brazilians, and that would probably create a lot of operating inefficiencies.
I mean, I want to be clear that Archer Daniels did not say that sugar ethanol imports from Brazil will be neutral to earnings to [where they are].
John Rice
We don't comment on that, but…
Pablo Zuanic
Well, you said just now on the quarter -- can I, and if you, I mean, I thought the way you answered the question that Christine asked was that if imports from Brazilian sugar ethanol came into the US, you said it would not affect our spread, because we probably would buy less corn, so corn prices will go down. So, I want to make sure that Archer Daniels today said for those listening in Washington DC, that if Brazilian sugar ethanol were coming to the US, that it will have no effect on Archer Daniels earnings.
Is that what you guys said?
JPMorgan
Well, you said just now on the quarter -- can I, and if you, I mean, I thought the way you answered the question that Christine asked was that if imports from Brazilian sugar ethanol came into the US, you said it would not affect our spread, because we probably would buy less corn, so corn prices will go down. So, I want to make sure that Archer Daniels today said for those listening in Washington DC, that if Brazilian sugar ethanol were coming to the US, that it will have no effect on Archer Daniels earnings.
Is that what you guys said?
John Rice
No, let me elaborate a little bit on this. What I said, or I felt like I was saying was that we will have more capacity coming into the United States and the opportunity for Brazilian ethanol to come into the United States will have an effect on the ethanol demand usage here in the United States.
Our plans, we feel, are very efficient, very cost effective, and we plan to run our operations very hard. We feel we're very cost-competitive.
During the summer months, we also tend to run our fructose plants harder, which can produce less ethanol, but that's a swing capacity we can have. And there are a lot of factors that come into the price of corn.
It's the exports out of South America. It's going to be the weather coming in here in March, April, and May.
We're getting good rains or we are not getting good rains. So, there are a lot of factors that affect the price of corn, the ethanol demand, and the ethanol usage.
If the discount gets high and up, we are going to see a lot more people start blending. But what I was trying to say is, yes, Brazilian ethanol coming into the United States can have an affect on the US market.
Pablo Zuanic
Thank you. And just a follow-up, if I may, about when you work.
Surely there are a lot of variables affecting ethanol prices in the coming months. In earlier remarks, did you tell us that you expect ethanol prices in the second half to be above what you're experiencing in the second quarter?
Was that as close you'd get to give guidance on ethanol prices there? Can you comment on that?
JP Morgan
Thank you. And just a follow-up, if I may, about when you work.
Surely there are a lot of variables affecting ethanol prices in the coming months. In earlier remarks, did you tell us that you expect ethanol prices in the second half to be above what you're experiencing in the second quarter?
Was that as close you'd get to give guidance on ethanol prices there? Can you comment on that?
John Stott
Our ethanol prices, we feel this next quarter will be high and third quarter will be higher than second quarter.
Pablo Zuanic
Okay, thanks. And then just on the sweetener side, in the last conference call, you talked about on the contract side, on the fixed-price contract side that you were looking about 10% increases.
Now that we are end of January, can you comment in terms of what has been generated there in term of contracts? And related to that, I think in a recent conference call, PVG in Mexico, they said they will not be using HFCS.
So, how does that affect your outlook for shipments of HFCS to Mexico?
JP Morgan
Okay, thanks. And then just on the sweetener side, in the last conference call, you talked about on the contract side, on the fixed-price contract side that you were looking about 10% increases.
Now that we are end of January, can you comment in terms of what has been generated there in term of contracts? And related to that, I think in a recent conference call, PVG in Mexico, they said they will not be using HFCS.
So, how does that affect your outlook for shipments of HFCS to Mexico?
John Rice
That 10% is accurate. That is the timing.
Some contracts started in January. Some contracts started in February, March, April, all the way through.
And we have seen demand pick up in Mexico. The relationships with the price of HFCS to sugar will have an impact on how much more or are able to ship down on Mexico.
So, I don't see anything. We have not heard from any of our customers down there that they will not be buying HSCS.
Pablo Zuanic
Thanks. And just if I may one last one.
Just like you were commenting, some of your clients in the ethanol side are more (inaudible), because what they see as a potential oversupply situation. How about on the corn side?
I mean because you're hedging on corn change, in any way given what the corn prices are, you are not as long as you normally would be. Can you give us some color there?
JP Morgan
Thanks. And just if I may one last one.
Just like you were commenting, some of your clients in the ethanol side are more (inaudible), because what they see as a potential oversupply situation. How about on the corn side?
I mean because you're hedging on corn change, in any way given what the corn prices are, you are not as long as you normally would be. Can you give us some color there?
John Stott
We are constantly, daily looking at how we run our risk management throughout our global assets. So, I guess I just assume to not comment or get into much detail on that.
But our strategy over the last couple of three years has not changed, when we buy our corn, how we hedge it on up. So softly is that change.
Pablo Zuanic
Okay. And if I may, just one very last one, I guess, the last one on the Q&A so.
When we took all volatility and price inflation in grains, I'm just wondering on the agricultural services side, is it really about volatility? Is that what had been helping you or is it just about inflation, the fact that you buy and then a few days later, grain prices continue to go up and you make a profit that way?
I mean to me, inflation is different from volatility. So I'm just trying to understand, it would seem to me that it is inflation that's helping you more than volatility.
JP Morgan
Okay. And if I may, just one very last one, I guess, the last one on the Q&A so.
When we took all volatility and price inflation in grains, I'm just wondering on the agricultural services side, is it really about volatility? Is that what had been helping you or is it just about inflation, the fact that you buy and then a few days later, grain prices continue to go up and you make a profit that way?
I mean to me, inflation is different from volatility. So I'm just trying to understand, it would seem to me that it is inflation that's helping you more than volatility.
John Stott
It's moving our global asset base and being able to source crops in different parts of the world, put them through our transportation assets throughout the world, put them on vessels and be able to ship customers has really been the driving force. And we are working with our customers on a lot of different commodities.
We can switch commodities for them. We give them a lot of flexibility.
So, it's the whole value chain that's really the effect on that. I'd say it's really not just the pure price.
Pablo Zuanic
Okay, thank you.
JP Morgan
Okay, thank you.
Operator
The next question is a follow-up question from the line of Robert Moskow with Credit Suisse. Please proceed.
Robert Moskow - Credit Suisse
Just a follow-up from Eric Katzman's question for John, in order for all that cash to come back out of working capital, corn prices and all the other grain prices, do they have to come down or can that cash come back even if the grain prices are now at a new threshold?
John Stott
It's a good question. I think just to be clear, LIFO is basically just a bookkeeping exercise.
It doesn't really affect cash. Clearly, either increases or decreases in commodity prices do have a direct impact on working capital.
So, really what would make some of that cash come back would be lower commodity prices, and there maybe a direct impact on lower LIFO too. You got to think about volumes too.
Increases and decreases in volumes have arguably a more dramatic effect on working capital needs than the absolute price changes themselves.
Robert Moskow - Credit Suisse
Okay, thank you.
Operator
This concludes our Q&A. At this time, I'd like to turn the call over to Pat Woertz for closing remarks.
Pat Woertz
Good. Well, thank you everyone for the interest in the company.
Sometimes you ask, are we happy with the quarter, and the answer was a big yes. And I think, again demonstrating our strength and diversity of our global network, we were able to capture opportunities.
So, thanks for your interest and we'll see you next quarter.
Operator
Thank you for your participation in today's conference. This concludes our presentation.
You may now disconnect and have a good day.